China factory activity contracts for 5th month: Official PMI

BEIJING - Reuters

Steel pipes are seen at a port to be loaded onto ships for export to various countries in Lianyungang, eastern China's Jiangsu province on December 1, 2015. AFP Photo

Activity in China’s manufacturing sector contracted for a fifth straight month in December, an official survey showed on Jan. 1, reinforcing fears the world’s second-largest economy may be stuck in a protracted slowdown despite a flurry of stimulus measures. 

While China’s services sector ended 2015 on a strong note, the economy still looked set to grow at its slowest pace in a quarter of a century, suggesting the government will have to step up support in 2016 to revive activity. 

The official manufacturing Purchasing Managers’ Index (PMI)stood at 49.7 in December, in line with expectations of economists polled by Reuters and up only fractionally from November. 

A reading below 50 points suggests a contraction in activity, while a reading above indicates an expansion on a monthly basis. 

Persistently soft demand from at home and abroad has weighed on China’s factories, leaving many with idle capacity and forcing them to slash selling prices, eating into their profits and adding to deflationary pressures in the broader economy. 

Total new orders - a proxy for both domestic and foreign demand - rose to 50.2 in December from November’s 49.8, the PMI survey showed. 

But export orders shrank for the 15th straight month, albeit at a less severe pace. The sub-index inched up to 47.5 from November’s 46.4. 

Real growth rate ‘lower’

The National Bureau of Statistics (NBS) said although oil prices were very low at present, cash at the end of the year was tight for factories, putting relatively large pressure on manufacturers. 

China’s economic growth is expected to cool from 7.3 percent in 2014 to 6.9 percent in 2015, the central bank said in a recent work paper, its slowest pace 25 years. It said growth could ease further to 6.8 percent in 2016. 

Some China watchers, however, believe real growth levels are already much weaker than official data suggest. 

Top leaders last week outlined the main economic targets for 2016, saying the government will push forward “supply-side reform” to help generate new growth engines as rust-belt industries such as steelmaking suffer. 

Some analysts expect Beijing will roll out more easing measures in the first quarter of 2016, including further cuts in interest rates and banks’ reserve requirement ratios to help re-energize activity. 

But the economy already has taken longer than usual to respond to a year-long blitz of easing measures and stimulus, suggesting it is facing more deep-rooted cyclical and structural weaknesses than in past downturns. 

A similar official survey on the services sector showed activity quickened in December. 

The services sector has been the lone bright spot in the economy in the last few years, helping to offset prolonged weakness in the vast manufacturing sector, though financial markets tend to focus more closely on factory readings. 

The official non-manufacturing Purchasing Managers’ Index (PMI) rose to 54.4, from November’s 53.6, according to the NBS. 

The services sector has accounted for the bigger part of China’s economic output for at least two years, with its share rising to 48.2 percent in 2014, compared with the 42.6 percent contribution from manufacturing and construction. 

A private gauge of Chinese manufacturing Caixin/Markit PMI, which focuses more on small-to-medium-sized private firms, will be released on Jan.4. 

China is set to release fourth quarter and full-year GDP data on Jan. 19.